Looking Outside The Box

"If you think you can, you can.  And if you think you can't you're right." - Mary Kay Ash

"The key to success is to risk thinking unconventional thoughts.  Convention is the enemy of progress.  If you go down just one corridor of thought you never get to see what is in the rooms that lead off it." - Trevor Baylis 

We all have heard the saying "think outside the box" so it was interesting to me when writing this blog to find out that the saying originated in 1914 with the standard nine-dot puzzle.  For those who have not done this puzzle put nine dots in a square on a piece of paper and see how few lines it takes to join the dots.  The solution is that you have to let the lines extend past the edges of the imaginary box but for some reason when we are first presented with the problem our brains automatically visualize a box and assume that we need to remain inside that imaginary square.  Thinking outside of this imaginary box provides the solution.

When it comes to investments I have repeatedly expounded on the need to think outside of the "normal" box of stocks and bonds as not doing so will create a significant issue for your retirement plans.  As a survey I looked at the wealthiest people that I know to see what they are doing differently from the rest of us and in almost all cases it is a clear case of outside the box thinking and investing.  Dissecting this group the majority own their own businesses; of the remainder some are paid very highly for what they do (think investment banking) but there is a group that have not earned much but have still managed to achieve a very high level of investment success and it is this investment success that has carried them to a wonderful retirement.

This last group is the one that interests me the most for a number of reasons; first they are normal 9 to fivers so we can all relate to them and second they have not had a lucky break like winning the lottery or being awarded a ton of stock options at the right time.  These are what I call regular people much like the majority of the country.  So when I read that the average retirement savings of the baby boomer in the United States is a mere $120,000 it is time to sit back and see how we as readers of this blog, can do things differently and become part of the group of "normal" people with large retirement accounts. 

A normal retirement plan suggests that you withdraw 4% of your net worth each year.  This amount supplements the income that will be generated from your pension from your job (if you have one which most of us do not) or the government payments from social security.  In the example above 4% of $120,000 is a mere $4,800 a year or $400 a month!  Add to that social security of say $1,500 a month and you will be retiring on less than $2,000 a month and this is before inflation takes a bite from this meager amount.  I don't know about you but there is no way I could retire on that amount as to me retirement would be some kind of a prison sentence rather than the fun thrill seeking adventures that I have envisioned and which are strengthened with advertisements on television.

So when I dissect the average person's investment portfolio I pretty much always find some mutual funds, a bit of cash and possibly a house.  Boiled down this equates to stocks, cash and property.  Well looking at the property first, most of the time it is not paid off so the value is often times minimal.  One quick solution here is a reverse mortgage which is why so many people are signing up for these but the reality is that this will often only provide you free accommodation (still a major win)but not a significant level of cash (unless you have a lot of equity built up).  Looking at the mutual funds they will be scattered around in various funds that are typically not producing much in the way of return or they will be bunched into one sector of the market.  The reason for this is that people do not pay attention to these investments and expect that they will take care of themselves and, as you can see, the majority of the population retires on nothing.

Looking at the group that can afford to retire and travel, they took control of their investments early.  They studied the markets and investment opportunities and looked outside of the box at alternatives in real estate (outside of their homes), private equity, hedge funds, commodities and other alternatives.  Their array of investments allowed them to participate in major upswings and limit the damage to the downside.  They rebalanced their portfolio during the good times to take advantage of deals when they presented themselves.  In short they worked their retirement money rather than turning a blind eye to it and their efforts were rewarded.  Make sure that you do the same as there is no safety net in retirement but the alternative investment may provide you with one.